Boom or Bust For the Franchise Industry?

December 2008W4Elizabeth D. Sigety

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The prevailing wisdom is that, as unemployment rises, the franchise industry flourishes - a phenomenon sometimes called "forced entrepreneurship." As the number of people without a job rises, more look to invest in franchises. Many of these people have business experience and a nest egg and are excellent candidates to invest in a franchise system. But in today's economy, credit is tight, which means leans are scarce for startup businesses - a situation that has counteracted the growth hoped for by many franchise systems.

Franchise Financing in Tough Economic Times

One typical type of financing for a new franchise is a bank loan backed by the Small Business Administration (SBA). Most local business banks can handle these types of loans. For a potential franchisee of an established franchise system, it may be somewhat easer to get an SBA loan because the SBA has vetted many of the established systems through the SBA's Franchise Registry, rendering some of the bank's investment about the business concept of the franchise unnecessary. However, the ultimate decision by the bank will also be based on the applicants credit and business plan. Another method for financing a startup business is to use the funds in a person's 401(k) plan for the new franchise corporation. The plan will invest in equity of the franchise corporation The new plan must be qualified with the IRS, so the franchisee should work with an attorney or other qualified individual. Caution must be exercised, of course, when pursuing this route since it is often not advisable to risk retirement assets in a startup business. In addition, if the franchise business will have employees beyond the founders, there may be complications relating to the plan's fiduciary responsibilities to those employees.